Corning: When Investors Ignore Dividend Increases

Corning Gorilla Glass
Corning Gorilla Glass

A curious thing happened with Corning last week. The company raised its quarterly dividend 20 percent to 9 cents a share, but the market yawned, and shares are now down about 2 percent since the announcement.

Somewhat quietly, Corning has nearly doubled its dividend in the past two years. The indicated yield, now at 2.7 percent, is very respectable, yet the company itself is not garnering much respect from the markets.

There’s little doubt that the challenging global economic environment has hurt; it’s part of the reason that Corning shares are trading at about the same price they did three and a half years ago.

While revenue rose 33 percent between 2008 and 2011, earnings have been a bit choppy, and net margins have fallen. Yet last quarter’s net profit margin was still 24.2 percent. Although that was down from 37.7 percent for the same quarter last year, it’s still impressive, especially for a company trading with a trailing price-to-earnings ratio (P/E) ratio of 9.

The rising dividend, to me at least, suggests management’s confidence is growing. As I’ve said before in previous columns, you can’t fake dividend increases.

The company also has been buying back stock; shares outstanding have been reduced by 63 million shares in the past year. Although buybacks remain somewhat controversial in the investment community, I like them when they’re in combination with a growing dividend.

Corning certainly has the resources for both buybacks and future dividend increases. The company ended the last quarter with $6.34 billion, or $4.21 a share, in cash and short-term investments.

Dripping with liquidity, the company has a current ratio of 5, and that measure is not impacted all that much by inventory; the quick ratio is 4.4.

Although debt stood at about $3.3 billion at the end of the quarter, the long-term debt-to-equity ratio is just 15 percent. Corning is also trading below tangible book value per share.

Given all of these measures, expectations are low for this company. Any hint of an economic recovery should fuel the stock’s recovery, but therein lies the major issue. When will we see signs a real economic recovery?

Certainly, Corning is not the only electronics or technology-related company that is trading at relatively cheap valuations. Look at Dell, which is trading with a P/E of less than 6.

Dell ended the last quarter with $11.9 billion, or $6.81 per share, in cash and short-term investments, while debt stood at about $8.4 billion. That puts the long-term debt-to-equity ratio at about 60 percent, which is a concern.

However, Dell recently initiated its first cash dividend, of 8 cents a share, for an indicated yield of 3.2 percent. The company has also been buying back stock actively.

In fact, shares outstanding have been reduced by more than 27 percent since 2006, and 12 percent in the past year alone. Still, the markets remain skeptical, as doubts have arisen about the future of the PC and the company itself.

Could Dell’s confidence, expressed via its dividend, be misplaced? Are the PC and Dell facing extinction? The stock certainly appears to be priced that way. We’ll see.

Frankly, I like it when everyone is writing off a particular company or industry. It sometimes provides opportunity. Sometimes there’s an overreaction. Look no further than Gannett, associated with the dying newspaper industry.

—By Contributor Jonathan Heller

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At the time of publication, Heller was long GCI.